Figure 1: Production Possibility Frontier Curve (of $700 billion):
A
B
National Debts
C
E
D
Bailing Out
Figure 1 demonstrates that if the $700 billion is prioritized to for reducing national debts, then there will be an opportunity cost for the that decision since the bailing out the banks become the second best choice (represented by A). On the other hand, if government provides the $700 billion to overcome the financial crisis then they have to abandon in reducing the national debts as it becomes its next best alternative (represented by D).
The U.S. is having hard time to overcome the financial crisis. This problem is caused by ‘sub-prime’ which is the type of mortgage that is normally made out to borrowers with lower credit ratings. As a result of the borrower’s lowered credit rating, the borrowers are allowed to buy their house without any large amount of interest. Thus, sub-prime has possibility to make better situation for consumers. However, if the value of the house price decreases from the value of the original price, it results into problems. Since these consumers cannot handle the interest when the price of the house goes down, as a consequence, they will not be able to pay back the money to the banks. Therefore, the banks have no source of income, and thus are faced with the possibility of becoming bankrupt (as there is a lack of confidence between the consumers and the banks). In addition, the bankruptcy of banks, which provides sub-prime mortgage, gives impact on the other banks like Lehman Bros. The Bush administration has to care about the consumers who have lost their houses and money. Hence, this is the reason why the government is seeking to borrow $700 billion from the Congress to help these people and companies.
Bush Administration’s solution:
However, there are also some possibilities that this solution can fail.
Possibility- if the solution failed to recover the problems?
Vicious Circle- Possibilities
When the U.S. untie the $700 billion dollars
In conclusion, there is an opportunity cost when the government decides to use $700 billion to bailout the banks since the same amount of money could be used for other purposes. Also, if the government does decide to take action, then the U.S. could no longer be labeled as a country that favors the free market since the rationing decisions is made by the government and not the supply/demand – a characteristic of a command economy; a contradiction to the idea presented by the article.
Furthermore, according to the article, the government should use $700 billion to bailout the banks in order to prevent further financial crises. As a result, in short term, there would be some advantages and drawbacks. For instance, it would prevent the banks from bankruptcy – satisfying the banks. On the other hand, the government could impose higher taxation to the consumers and high/low income people. And in long terms, the banks will be stabilized, and this will ultimately satisfy the consumers since they can borrow the money from the banks. Nonetheless, ceteris paribus, many economists suggest that this action of bailing out the banks could possibly lead or result into further financial crises because there is no guarantee that the financial crises could be prevented by just providing $700 billion. Regardless of the possible negative consequences, the assumptions presented in the article could be valid due to the fact that the amount of $700 billion could take care of the financial crises. In other words, the $700 billion is sufficient enough to solve the present situation. Therefore, the best alternative will be to use $700 billion to rescue the financial crises, and the government could use the remaining money to alleviate the national debt.
Source:
Crustinger, Martin. “Economists see financial bailout as necessary.” Yahoo! News. Sep 20, 2008. Sep 25, 2008. <http://news.yahoo.com/s/ap/20080920/ap_on_bi_ge/financial_meltdown_ economy;_ylt=AuEfoKbnZD27VMcdNGRZ3jNv24cA>
